final project (security analysis class)
DESCRIPTION
now, at $2.4 per share this might actually be an interesting idea for merger arbitrageurs. Who is buying?TRANSCRIPT
1
Millennial Media (MM)Security Analysis
04/09/2014Ivan Titkov, Sucharita Sridhar, Pavel Fadeev, Ekaterina Kosheleva
2
Recommendation: SELL
� Rising threat from publishers who are increasingly competing in network business and will likely steal market share
� Ambitious operating margin expansion of 20% is already priced into the current stock price
� Combination of management’s track record and formal incentives does not support the operational efficiency turnaround scenario
$6.61Current price
$3.14 (-53%)Target price
3
Millennial Media is #2 Mobile Advertising Network with Holistic Value Proposition Across the Value Ch ain
Brief history
• Established in 2006, receiving total
funding of USD 65 mln in 2006-2011
• Went public in March 2012, selling
14% of shares for USD 132.6 mln ($13
per share), which implied total
company valuation of ~$1 bln
• Changed CEO in 2014, as the
founder/ex-CEO has left the company
Operations
• Millennial Media sells advertising space within mobile websites
and applications to advertising companies:
• Value proposition:
– Serves customers on cross-platform basis (iOS and Android)
– Tailors ad content to user profiles
– Provides plug-n-play development kits
• # 2 player globally, with 14% of the display mobile ad market
• Serves 90 out of Top-100 advertisers1
• Revenue from international operations increased 2.5x in 2013, up
from 15% to 24% of total sales
1 As defined by Ad AgeSource: Company’s 10-K, team analysis
AdvertisersMobile app
developers
% of advertising fee
Aggr. data
for targetingUsers’ response
Ads Ads
Advertising fee
Ownership & Capital structure
12%
Insiders
31% VC58%
Institutions
+ free float
• MCap: $705
• All-equity
financed
4
40%40%39%34%
29%
Revenue Growth is Offset by High Operating Expenses
Millennial Media’s financials in 2009-2013 Net income reconciliation from 2012 to 2013
Re
ve
nu
e a
nd
Gro
ss P
rofi
t
Op
era
tin
g
ex
pe
nse
sC
F f
rom
op
era
tio
ns
259
178104
4816
-15
-5-1
-7-7
-21
-3-3-11
-6
201320122009 20112010
49
15
5
-15
-5
Cost of
revenue
Revenue
NI 2013
Other 1
NI 2012
82
G&A 23
T&D
S&M
Operating
expenses
Source: Company’s 10K, team analysis
USD mln
Revenue
Gross
Profit
Margin
EBIT
EBIT
margin
-1%
-46%-15%
-6%-3%
5
Stock is Up on Strategic Moves, Down on Financial R esults
Source: Bloomberg, press search, team analysis
27
24
21
0
18
9
12
15
MA M J J A S O N D J F A M J J A S O N MD J F
2012 2013 2014
March 28 2012: MM sells
10.2M stocks at IPO at $13
per share, above the price
range of $10-11
Price doubles
in the first
trading day
Quarterly/annual
report published
missing investors’
aspirations
Oct 2012: Yahoo
rumored to have
interest in MM
Feb 2013:
Metaresolver
acquisition
announced
Jun 2013:
Expansion to
Japan
Aug 2013: Announced
expansion to LatAm,
partnering with local
partner (AdMovil)
Aug 2013:
Agreement on
Jumptap
acquisition
announced
Jan 2014: New CEO
appointed
6
Fragmented and Very Crowded Market
Source: “U.S. Digital Advertising” by Coady Diemar Partners, October 2012
7
Mobile Advertising Industry is Attractive
13%
Online
5%
Mobile
12%
3%
21%
9%
20%
PrintRadio
25%
TV
39%40% Time Spent Share
Ad Spend Share
Source: eMarketer, Gartner
42
31
25
19
139
4
+34%
2017E2016E2015E2014E201320122011
+73%
CAGR
US Time Spent vs. Ad Spend Share, 2013
Global Market Advertising Spend
CAGR
8
Competition – Mobile Ad Networks
• Compete on technology platform and data analytics
• Increasingly publishers are competing in this space
• Industry consolidation
Barriers to Entry
• Low capital intensity business
• Network effects make achieving scale challenging
Buyers – Advertisers
• Want access to a large base of developers and end users.
• Strong network effects
Suppliers – App Developers
• Driven primarily by access to large advertiser base
Substitutes
• Other forms of advertising, especially online advertising
• Mobile advertising still not as effective as other forms, does not command as high prices
Competition and Consolidation Intensify as Publishe rs Increasingly Compete with Networks
9
OpEx Efficiency is Major Value Driver
Source: SEC filings
60
24
15
-6
100
Revenue Cost of Revenue EBITSales &
Marketing
Technology &
Development
G&A
7
Factors of
change
Millennial Media Cost Structure, as of 2013
% of revenue
Both, revenue and COR are
market-implied, influenced by
other segments as well. No real
levers to pull on
Fee paid to
publisher
(app developer)
Back office
efficiency
Programmatic
ads and
exchange -
based sales
Integrated value
chain implies
development costs
to stay constant
10
Our Valuation Approach
• What has to happen in order for the current share
price to makes sense fundamentally?
• DCF analysis – assumptions:
• Market grows 35% until 2017, stabilizes by 2022
• Stable gross margin
• MM’s market share and EBIT margins – scenarios
• WACC – 12% (all equity financed), TGR – 2%
11
What Has to Happen?
Annual market share gain/(loss), p.p. Implied operating0.25% 0.00% -0.25% -0.75% -1.25% -1.75% margin by 2022
Annual margin improvement >> 4.5% $13.3 $12.1 $10.9 $8.5 $6.1 $3.7 21%4.0% $10.9 $10.0 $9.0 $7.0 $5.1 $3.1 18%3.2% $7.2 $6.6 $6.0 $4.7 $3.5 $2.2 13.4%3.0% $6.3 $5.7 $5.2 $4.1 $3.1 $2.0 12%2.0% $1.7 $1.6 $1.5 $1.3 $1.1 $0.9 6%1.0% ($2.7) ($2.4) ($2.0) ($1.4) ($0.8) ($0.1) 0%
Implied MM market share by 2022 15.3% 13.8% 12.3% 9.3% 6.3% 3.3%
• Status quo: 13.8% market share, -5.8% operating margin in FY2013
• Market share stabilizes by 2019
• Margins improve gradually and stabilize by 2019
Can we achieve a ~19% improvement in operating marg in?
> Current price (upside)
< Current price (downside)
12
MM Has to Become Better Than Google!
% of revenue
Operational improvements required for EBIT to justify current price level
13
-6
R&DG&A
-16
Sales & Marketing
-30
EBIT margin
as of 2013
EBIT margin for
current price to
be true• From: 24% in
2013
• To: 8% achieved
by Google
Source: Capital IQ, team analysis
• From: 15% in
2013
• To: 12% achieved
by Google
• Stays on current
7% industry-low
level (Google has
13%)
• Operating efficiency in IT is rather a function of company culture than of scale
• While cost cutting by several p.p. is ambitious goal itself, it also carries certain risk for
growth maintenance
• Is company’s management skillful enough and properly incentivized to lead the
change?
13
Management Focused on Growth, Not on Profit
MM brought in an experienced
team of executives and the Board…
…though not incentivized for long-
term efficiency improvements
• The founder has recently left the
firm and insiders are selling
• Six executives were previously
responsible for ad segment at
Yahoo, with no significant success
• Strategic objectives are targeting
new markets and technologies,
but not internal efficiency
• Incentive plan is growth-oriented:
Source: Company’s data, team analysis
60%Revenue
20%EBITDA
20%
Discretionary
CEO, M. Barrett. Ex-Chief
Revenue Officer of Yahoo,
appointed in Jan 2014
CFO, M. Avon. Ex-Principal
at Columbia Capital LLC
VP of S&M, M. Spilman,
ex-CFO of Yahoo
Chairman, P. Kerins.
General Partner at New
Enterprise Associates VC
fund
There is a high
probability of
further focus
on revenue
growth at
expense of
shareholder’s
value
14
Risk-Reward Asymmetry – Supports SELL Case
Bull case $7.74 (+17%)
Current price $6.61
Base case $2.96 (-55%)
Bear case $1.47 (-78%)
• MM maintains market share
• Operating margin → 15% (better than
Google)
• MM maintains market share
• Operating margin → 8% (~Yahoo + 2%
from S&M and R&D)
• Market share → 10.8% in the long run
• Operating margin → 8% (~Yahoo)
+21%
+14%
+12%
Bull case assumptions (Probability – 0.1)Bull case assumptions (Probability – 0.1)
Bear case assumptions (Probability – 0.2)Bear case assumptions (Probability – 0.2)
Base case assumptions (Probability – 0.7)Base case assumptions (Probability – 0.7)
∆ margin∆
margin
Prob. weightedtarget price $3.14 (-53%)
15
Key Risks to the SELL Case
• Potential acquisition by a large newcomer / competitor
− Yahoo, Microsoft, AOL…
• Share price may be driven by topline growth despite
weak fundamentals
• Gross margin improvement
16
THANK YOU
17
APPENDIX
18
Publishers /
DevelopersAdvertisers
Supply-Side Platforms
(SSP) Real Time Bidding
Exchange (RTB)
Demand-Side Platforms
(DSP)
Mobile Ad Network
(Mediation)
(AdMob acquired by Google in 2009)
(rumored to be acquired by Perion)
(acquired in 2010) (acquired in 2010)
(acquired by Twitter in 2013)
Other
Lay of the Land
(mobile version WIP)
19
OpEx Efficiency is the Main Value Driver
1 Based on MM, MRIN, GOOGL, YHOO, LNKD, FB, YUME,VELT2 Google’s level, not adjusted for expenses attributed to the cost of revenue Source: company 10K, Capital IQ, team analysis
15
-6
24
100
60
Revenue Cost of Revenue EBITSales &
Marketing
Technology &
Development
G&A
7
Factors of
change
Industry
average1
Best
practice
Millennial Media Cost structure, as of 2013
% of revenue
Both, revenue and COR are
market-implied, influenced by
other segments as well. No real
levers to pull on
Fee paid to
publisher
(app developer)
Back office
efficiency
Programmatic
ads and
exchange -
based sales
Integrated value
chain implies
development costs
to stay constant
38 16 26 15 3
22 82 12 7 24
20
OpEx Comparable with Peers
Operating expenses,
% of revenue
As of 2013
SG&A1 Marketing
Revenue per employee, USD mln
46,2
46,0
29,6
74,9
105,2 0,4
2,1
1,0
1,0
4,3
Total
0,5
0,7
1,4
0,7
3,9
0,2
0,3
0,4
0,3
1,3
1 Adjusted: all operation-related employees included in SG&ASource: Company’s 10K, team analysis
21
-10
7,50,0 5,02,5 10,0
10
20
45,025,0 47,5
-20
50
20,0 42,5
40
17,5
60
-240
40,0 60,0
30
27,5
0
Revenue, USD bln
EBIT margin,%
MM
Yahoo
What a Buy Rating Would Imply?
Safe BUY case assumes
company reaches EBIT
margin of ~14% by 2022
IT companies were able
to reach EBIT margin of
15% and higher only
after gaining a scale of
~$1 bln in revenues
Source: Capital IQ, team analysis
BUY zone
Companies tend to stay on the
same level of operating
efficiency regardless of the size
they achieve
22
80
60
40
20
100
200
110
5 10 2520 30 35
190
210
50
70
30
10
90
60
0
0
Revenue, USD bln
Opex, % of Revenue
Yahoo
Operating Efficiency is a Company-Specific Attribut e
Source: Capital IQ, team analysis
Evidence suggest that
companies tend to stay on the
same level of operating
efficiency regardless of the size
they achieve
23
Stock Performance: Worse Than Stars, in Line With P eers
1.4
0.6
0.8
1.0
1.2
1
YUME
MMMRIN
MobileAd companies’ stock performance in August 2013-March 2014
0.4
0.6
0.2
0.8
1.0
1.2
1
MM (Mar 2012-Mar 2013)
LinkedIn (May 2011-May 2012)
FB (May 2012-May 2013)
Tech companies’ stock performance in their first post-IPO year
Source: Bloomberg, team analysis
24
Recent M&A Activity in the SpaceAcquirer Target Date Rationale
Purchase price
RevenueAcquisition
multiple
August 2013
Jumptap's focus on performance advertising and ad exchange capabilities enhanced MM's integrated offering. Access to Jumptap's 3rd party data. Cost synergies (~$25mm)
$187
$63.6mm / $53.0mm
(excl. portal revenue)
2.9x
October 2013 Gain foothold in the mobile advertising market $350 $100 3.5x
November 2009 Access mobile web and app display ad market $750 $100 7.5x
January 2010Enter mobile ad marketIncrease iPhone's attractiveness for app developers
$275 $21 13.1x
April 2011Step into mobile advertising market; revenue synergies with ValueClick's existing online ad business
$70 $25-$30mm 2.3x-2.8x
March 2012
Push into mobile ad market as traditional voice revenues decline(SingTel is a leading mobile career in the Asia-Pacific region)
$321 $30 10.7x
April 2011Enhance Motricity's product offering in the mobile Internet space
$100 $20 5.0x
Average 6.5x
25
Unit Economics – Online Advertising Example
100%90%
10%
0%
20%
40%
60%
80%
100%
Advertiser Agency Publisher
100%
35%
10%
35%
20%
0%
20%
40%
60%
80%
100%
Advertiser Agency Network SSP Publisher
100%
40%
10%
10%
20%
20%
0%
20%
40%
60%
80%
100%
Advertiser Agency DSP Exchange SSP Publisher
Direct Sales Channel
Indirect: Network Model Indirect: Exchange Model
Source: “Tectonic Shifts in Online Display Advertising” by Credit Suisse, 2/21/2012
55% 50%
vs. ~40% in mobile
The industry standard has evolved towards roughly 60% developer share …
Goldman Sachs, 5/8/12
Google’s AdSense is currently experiencing take rates on desktop of 32% on content adsand 49% (owing to Google’s search dominance) on partner search ads…
Conaccord Genuity, 6/25/2012
no empirical evidence of rising “take rates”
26
Consolidated Statement of Cash FlowsConsolidated Statements of Cash Flows (USD $) 12 Months Ended
In Thousands, unless otherwise specified 31-Dec-13 31-Dec-12 31-Dec-11 31-Dec-10 31-Dec-09
Cash flows from operating activities
Net loss (15,113) (5,430) (287) (7,121) (7,550)
Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities:
Stock-based compensation expense 8,953 7,474 1,832 412 212
Non-cash change in fair value of Series B warrant 834 78 79 -
Non-cash acquisition related costs 111
Bad debt expense 1,766 1,639 345 870 161
Deferred income taxes (481) - -
Depreciation and amortization 5,913 2,365 759 223 146
Amortization of discount on long-term debt 12 13
Amortization of deferred financing fees 61 28 12 13 13
Unrealized foreign currency (gain) loss (84) (98) 38
Changes in assets and liabilities, net of acquired balances:
Accounts receivable (28,117) (25,733) (15,379) (14,370) (4,366)
Prepaid expenses and other current assets (1,299) (542) (1,027) (294) 4
Other assets 363 (249) (399) (84) -
Accounts payable and accrued expenses (4,740) 2,884 1,817 716 64
Accrued cost of revenue 11,455 13,467 7,942 7,436 3,879
Accrued payroll and payroll related expenses (1,096) 869 2,005 1,276 1,171
Other long-term liabilities 292 (57) 181 20 93
Deferred revenue 116 12 (194) 329 (13)
Net cash and cash equivalents used in operating activities (21,419) (2,537) (2,758) (10,483) (6,173)
Cash flows from investing activities
Net cash from acquisitions 1,968 (2,060) (72) -
Purchases of property and equipment (5,080) (5,260) (3,528) (640) (79)
Net cash and cash equivalents used in investing activities (3,112) (5,260) (5,588) (712) (79)
Cash flows from financing activities
Repayment of credit line (4,003)
Repayment of long-term debt (10,353) (2,250) (750)
Repurchase and retirement of common shares (827) (5,505) -
Proceeds from issuance of common stock, net of offering costs 127,030
Payment of deferred offering costs (1,985) - -
Payment of deferred financing fees (57) - -
Proceeds from exercises of stock options 1,462 1,496 166 127 53
Share issuance costs (116)
Withholding payments for vesting of restricted stock units (518)
Issuance of Series C preferred shares, less offering costs - 15,920
Issuance of Series D preferred shares, less offering costs 27,459 -
Net cash and cash equivalents provided by (used in) financing activities (13,528) 128,526 (2,703) 19,831 15,223
Effect of exchange rates on cash and cash equivalents (143) 3 (47) (4) -
Net (decrease) increase in cash and cash equivalents (38,202) 120,732 (11,096) 8,632 8,971
Cash and cash equivalents, beginning of the period 137,439 16,707 27,803 19,171 10,200
Cash and cash equivalents, end of the period 99,237 137,439 16,707 27,803 19,171
27
Consolidated Balance SheetConsolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified 31-Dec-13 31-Dec-12 31-Dec-11 31-Dec-10
Current assets:
Cash and cash equivalents 99,237 137,439 16,707 27,803
Restricted cash 320
Accounts receivable, net of allowances 109,056 59,179 34,986 19,978
Prepaid expenses and other current assets 4,243 1,966 1,417 352
3% 2% 2% 1%
Total current assets 212,856 198,584 53,110 48,133
Long-term assets:
Property and equipment, net 12,663 6,850 3,688 741
Restricted cash 515
Goodwill 135,489 1,348 1,348
Intangible assets, net 57,706 913 1,179 66
Deferred offering costs 1,985
Other assets 375 754 575 175
Total long-term assets 206,748 9,865 8,775 982
Total assets 419,604 208,449 61,885 49,115
Current liabilities:
Accounts payable and accrued expenses 7,617 3,788 2,883 1,020
Accrued cost of revenue 65,053 34,430 20,963 13,054
Accrued payroll and payroll related expenses 8,767 6,038 5,153 3,137
Deferred revenue 868 169 157 351
Total current liabilities 82,305 44,425 29,156 17,562
Long-term liabilities
Series B warrant outstanding 183 105
Other long-term liabilities 1,829 243 299 140
Total liabilities 84,134 44,668 29,638 17,807
Redeemable convertible preferred stock:
Total redeemable convertible preferred stock 76,668 71,622
Stockholders' (deficit) equity:
Common stock, $0.001 par value 106 79 17 16
Additional paid-in capital 400,716 213,823
Accumulated other comprehensive loss (196) (78) (25) (11)
Accumulated deficit (65,156) (50,043) (44,413) (40,319)
Total stockholders' (deficit) equity 335,470 163,781 (44,421) (40,314)
Total liabilities, redeemable convertible preferred stock and stockholders' (deficit) equity419,604 208,449 61,885 49,115
28
Consolidated Statement of Operations
Consolidated Statements of Operations (USD $) 12 Months Ended
In Thousands, except Per Share data, unless otherwise specified 31-Dec-13 31-Dec-12 31-Dec-11 31-Dec-10 31-Dec-09
Revenue 259,171 177,667 103,678 47,828 16,220
Cost of revenue 154,774 105,739 63,595 31,602 11,596
Gross profit 104,397 71,928 40,083 16,226 4,624
Operating expenses:
Sales and marketing 38,682 23,816 14,255 8,508 4,609
Technology and development 18,966 13,620 5,181 2,175 1,095
General and administrative 61,891 38,954 21,321 12,535 6,326
Total operating expenses 119,539 76,390 40,757 23,218 12,030
Loss from operations (15,142) (4,462) (674) (6,992) (7,406)
Interest and other income (expense):
Interest expense, net (95) (64) (21) (28) (144)
Other income (expense) 77 (834) (78) (79)
Total interest and other income (expense) (18) (898) (99) (107) (144)
Loss before income taxes (15,160) (5,360) (773) (7,099) (7,550)
Income tax benefit (expense) 47 (70) 486 (22)
Net loss (15,113) (5,430) (287) (7,121) (7,550)
Accretion of dividends on redeemable convertible preferred stock (1,328) (5,022) (2,933) (1,793)
Net loss attributable to common stockholders (15,113) (6,758) (5,309) (10,054) (9,343)
Net loss per share:
Basic and diluted (in dollars per share) (0.18) (0.11) (0.32) (0.56) (0.56)
Weighted average common shares outstanding:
Basic and diluted (in shares) 84,029 60,951 16,363 17,966 16,783
Stock-based compensation expense included above:
Stock-based compensation expense 8,953 7,474 1,832 412 212